With a new administration comes many potential changes that can affect your personal finances and estate planning. This year, high-income earners should pay particularly close attention to changes to tax law. The Biden tax plan includes several provisions for households earning more than $400,000 per year. Here are a few things you should know for 2021 estate planning.

Higher Tax Rates

Standard Tax Rate

First and foremost, if you earn over $400,000 per year, your tax rate may be increasing. For earners between $400,000 and $780,000, the proposed tax rate is 39.6% (a 4.6% increase). Households earning above $780,000 will see a 2.6% increase from 37% to 39.6%. If you fall into either of these categories, it’s important to evaluate your financial plan for the year. You may need to increase your income tax pre-payments and make other adjustments given a lower net income after taxes.

Long-term Capital Gains

One of the most significant proposed changes to tax law is long-term capital gains tax. The Biden tax proposal would increase long-term capital gains from a maximum of 20% to 39.6%, so almost double. Don’t forget the added 3.8% surtax, which is already in place and will remain. If you are planning to sell any long-term assets this year, be sure to evaluate the tax implications and consider tax deferral options such as a 1031-exchange.

Changes to Deductions

Itemized Deductions

Itemized deductions for high-income earners will be limited to 28%. Therefore, deductions may not be an effective strategy for reducing income taxes. Discuss other options with a financial planner and tax professional.

Qualified Business Income

Another big change proposed is the elimination of the Qualified Business Income (QBI) deduction for high earners. Currently, QBI allows self-employed individuals to take a deduction equal to 20% of net self-employment income. The removal of this deduction for those earning above $400,000 can be quite large. For example, let’s assume a $500,000 self-employment net income. 20% QBI would exclude $100,000 from taxation. At a 39.6% tax rate, that’s a difference of $39,600 in taxes owed.

2021 Estate Planning Based on Changes to Tax Law

How does this all relate to estate planning? Financial planning and estate planning go hand-in-hand. Your estate plan references your assets and is structured based on the amount and types of assets held. If the 2021 tax plan is approved, it will apply to the entire calendar year. So, it should motivate decisions both now and throughout the year. As you make adjustments to assets and debts, that should naturally trickle through to your estate plan. This is the best time of year to start thinking about all of this!

Please keep in mind that the above is a generalization of 2021 tax changes and estate planning. Your personal circumstances are unique and require a customized approach. Be sure to contact your financial advisor before making adjustments to your financial plan. Contact our team to discuss your estate planning goals and update your estate plan as well.